Building Vaults on Bitcoin

Day 10: Rubin's Bitcoin Advent Calendar

Welcome to day 10 of my Bitcoin Advent Calendar. You can see an index of all the posts here or subscribe at judica.org/join to get new posts in your inbox

A “Vault” is a general concept for a way of protecting Bitcoin from theft through a cold-storage smart contract. While there is not formal definition of what is and is not a Vault, generally a Vault has more structure around a withdrawal than just a multisig.

One of the earlier references for Vaults was a design whereby every time you request to withdraw from it you can “reset” the request within a time limit. This means that while an attacker might steal your keys, you can “fight” to make it a negative sum game – e.g., they’ll just keep on paying fees to eventually steal an amount less than they paid. This might serve to disincentivize hacking exchanges if hackers are less likely to actually get coins.

Similar Vaults can be built using Sapio, but the logic for them involves unrolling the contract a predefined number of steps. This isn’t bad because if the period of timeout is 1 week then just unrolling 5,200 times gets you one thousand years of hacking disincentive.

The contract for that might look something like this in Sapio (note: I was running behind on this post so I may make modifications to make these examples better later):

struct VaultOne {
    /// Key that will authorize:
    /// 1) Recursing with the vault
    /// 2) Spending from the vault after not moved for a period
    key: bitcoin::PublicKey,
    /// How long should the vault live for
    steps: u32,
}

impl VaultOne {
    /// Checks if steps are remaining
    #[compile_if]
    fn not_out_of_steps(self, ctx: Context) {
        if self.steps == 0 {
            ConditionalCompileType::Never
        } else {
            ConditionalCompileType::NoConstraint
        }
    }

    #[guard]
    fn authorize(self, ctx: Context) {
        Clause::Key(self.key.clone())
    }

    /// Recurses the vault if authorized
    #[then(compile_if = "[Self::not_out_of_steps]", guarded_by = "[Self::authorize]")]
    fn step(self, ctx: Context) {
        let next = VaultOne {
            key: self.key.clone(),
            steps: self.steps - 1,
        };
        let amt = ctx.funds();
        ctx.template()
            .add_output(amt, &next, None)?
            // For Paying fees via CPFP. Note that we should totally definitely
            // get rid of the dust limit for contracts like this, or enable
            // IUTXOS with 0 Value
            .add_output(Amount::from_sat(0), &self.key, None)?
            .into()
    }
    /// Allow spending after a week long delay
    #[guard]
    fn finish(self, ctx: Context) {
        Clause::And(vec![
            Clause::Key(self.key.clone()),
            RelTime::try_from(Duration::from_secs(7 * 24 * 60 * 60))
                .unwrap()
                .into(),
        ])
    }
}
/// Binds the logic to the Contract
impl Contract for VaultOne {
    declare! {then, Self::step}
    declare! {finish, Self::finish}
}

But we can also build much more sophisticated Vaults that do more. Suppose we want to have a vault where once a week you can claim a trickle of bitcoin into a hot wallet, or you can send it back to a cold storage key. This is a “structured liquidity vault” that gives you time-release Bitcoin. Let’s check out some code and talk about it more:

#[derive(Clone)]
struct VaultTwo {
    /// Key just for authorizing steps
    authorize_key: bitcoin::PublicKey,
    amount_per_step: bitcoin::Amount,
    /// Hot wallet key
    hot_key: bitcoin::PublicKey,
    /// Cold wallet key
    cold_key: bitcoin::PublicKey,
    steps: u32,
}

impl VaultTwo {
    #[compile_if]
    fn not_out_of_steps(self, ctx: Context) {
        if self.steps == 0 {
            ConditionalCompileType::Never
        } else {
            ConditionalCompileType::NoConstraint
        }
    }

    #[guard]
    fn authorized(self, ctx: Context) {
        Clause::Key(self.authorize_key.clone())
    }
    #[then(compile_if = "[Self::not_out_of_steps]", guarded_by = "[Self::authorized]")]
    fn step(self, ctx: Context) {
        // Creates a recursive vault with one fewer steps
        let next = VaultTwo {
            steps: self.steps - 1,
            ..self.clone()
        };
        let amt = ctx.funds();
        ctx.template()
            // send to the new vault
            .add_output(amt - self.amount_per_step, &next, None)?
            // withdraw some to hot storage
            .add_output(self.amount_per_step, &self.hot_key, None)?
            // For Paying fees via CPFP. Note that we should totally definitely
            // get rid of the dust limit for contracts like this, or enable
            // IUTXOS with 0 Value
            .add_output(Amount::from_sat(0), &self.authorize_key, None)?
            // restrict that we have to wait a week
            .set_sequence(
                -1,
                RelTime::try_from(Duration::from_secs(7 * 24 * 60 * 60))?.into(),
            )?
            .into()
    }
    /// allow sending the remaining funds into cold storage
    #[then(compile_if = "[Self::not_out_of_steps]", guarded_by = "[Self::authorized]")]
    fn terminate(self, ctx: Context) {
        ctx.template()
            // send the remaining funds to cold storage
            .add_output(self.amount_per_step*self.steps, &self.cold_key, None)?
            // For Paying fees via CPFP. Note that we should totally definitely
            // get rid of the dust limit for contracts like this, or enable
            // IUTXOS with 0 Value
            .add_output(Amount::from_sat(0), &self.authorize_key, None)?
            .into()
    }
}

impl Contract for VaultTwo {
    declare! {then, Self::step, Self::terminate}
}

This type of Vault is particularly interesting for e.g., withdrawing from an exchange business. Imagine a user, Elsa who wants to have a great cold storage system. So Elsa sets up a xpub key and puts it on ice. She then generates a new address, and requests that the exchange let the funds go to it. Later that month, Elsa wants to buy a coffee with her Bitcoin so she has to thaw out her cold storage to spend (maybe using a offline PSBT signing), and transfer the funds to her destination or to a hot wallet if she wants a bit of extra pocket money. Instead suppose Elsa sets up a timerelease vault. Then, she can set up her cold vault and automatically be able to claim 1 Bitcoin a month out of it, or if she notices some coins missing from her hot wallet redirect the funds solely under her ice castle.

This has many benefits for an average user. One is that you can invest in your cold storage of keys once in your life and only have to access it in unexpected circumstance. This means that: users might elect to use something more secure/inconvenient to access (e.g. strongly geo-sharded); that they won’t reveal access patterns by visiting their key storage facility; and that they don’t need to expose themselves to recurring fat-finger¹ risk.

Getting a little more advanced

What are some other things we might want to do in a vault? Let’s do a quickfire – we won’t code these here, but you’ll see examples of these techniques in posts to come:

Send a percentage, not a fixed amount

Let the contract know the intended amount, and then compute the withdrawals as percentages in the program.

Non-Key Destinations

In the examples above, we use keys for hot wallet, cold wallet, and authorizations.

However, we could very well use other programs! For example, imagine a time-release vault that goes into a anti-theft locker.

Change Hot Wallet Every Step

This one is pretty simple – if you have N steps just provide a list of N different destinations and use the i-th one as you go!

Topping up:

There are advanced techniques that can be used to allow depositing into a vault after it has been created (i.e., topping up), but that’s too advanced to go into detail today. For those inclined, a small hint: make the “top up” vault consume an output from the previous vault, CTV commits to the script so you can use a salted P2SH out.

Even more advanced

What if we want to ensure that after a withdraw funds are re-inserted into the Vault?

We’ll ditch the recursion (for now), and just look at some basic logic. Imagine a coin is held by a cold storage key, and we want to use Sapio to generate a transaction that withdraws funds to an address and sends the rest back into cold storage.

struct VaultThree {
    key: bitcoin::PublicKey,
}

/// Special struct for passing arguments to a created contract
enum Withdrawal {
    Send {
        addr: bitcoin::Address,
        amount: bitcoin::Amount,
        fees: bitcoin::Amount,
    },
    Nothing,
}
/// required...
impl Default for Withdrawal {
    fn default() -> Self {
        Withdrawal::Nothing
    }
}
impl StatefulArgumentsTrait for Withdrawal {}

/// helper for rust type system issue
fn default_coerce(
    k: <VaultThree as Contract>::StatefulArguments,
) -> Result<Withdrawal, CompilationError> {
    Ok(k)
}

impl VaultThree {
    #[guard]
    fn signed(self, ctx: Context) {
        Clause::Key(self.key.clone())
    }
    #[continuation(guarded_by = "[Self::signed]", coerce_args = "default_coerce")]
    fn withdraw(self, ctx: Context, request: Withdrawal) {
        if let Withdrawal::Send { amount, fees, addr } = request {
            let amt = ctx.funds();
            ctx.template()
                // send the rest recursively to this contract
                .add_output(amt - amount - fees, self, None)?
                // process the withdrawal
                .add_output(amount, &Compiled::from_address(addr, None), None)?
                // mark fees as spent
                .spend_amount(fees)?
                .into()
        } else {
            empty()
        }
    }
}
impl Contract for VaultThree {
    declare! {updatable<Withdrawal>, Self::withdraw}
}

Now we’ve seen how updatable continuation clauses can be used to dynamically pass arguments to a Sapio contract and let the module figure out what the next transactions should be, managing recursive and non-enumerated state transitions (albeit with a trust model).

That’s probably enough for today, before I make your head explode. We’ll see more examples soon!

Sapio Primer

Day 9: Rubin's Bitcoin Advent Calendar

Welcome to day 9 of my Bitcoin Advent Calendar. You can see an index of all the posts here or subscribe at judica.org/join to get new posts in your inbox

We’re through the basics sections of the Advent calendar ow! Time for some more… specific content on the bleeding edge!

This post is your introduction to the world of Sapio. Sapio is the programming framework I’ve been developing for Bitcoin Smart Contracts. There’s a ton of material on the website, so this post is going to be a bit high-level and then you should jump into the docs after to learn more.

What the heck is Sapio?

Sapio is a tool that helps you design and use Bitcoin smart contracts based on covenants (like CTV) as well as manage potentially recursive state transitions at terminal states.

That’s a mouthful and a half… let’s break it down with a very basic vault deposit example.

Suppose I have 10 bitcoin sitting in my normal wallet. I want to deposit it to an exchange. I go to my exchange and request an address to deposit to. The exchange wants their coins to be in a special cold storage whereby any move from cold storage has to “mature” for 10 days since it was claimed before it’s spendable as a hot-spend, otherwise it stays in cold. The hot wallet has logic such that any unused funds after it transacts, goes back into the cold-storage contract. We saw a contract like this in the day 7 post.

The exchange can use Sapio to generate an address that expects 10 coins and encodes this cold-to-hot logic without requiring the cold keys be online! Better than that, I don’t even have to contact the exchange for the address. The exchange can distribute a codesigned Sapio WASM applet that runs on my own machine locally. I download the applet into my Sapio Studio GUI and that generates the exchange deposit UX form for the contract that I (or my wallet) automatically fills out and then generates a proper address/spending transaction.

Upon receipt of the deposit information, (which can in certain circumstances be completely on-chain in the txn, so no need for a separate communication channel), the exchange can us the WASM to generate an identical deposit program to verify the user isn’t cheating somehow. Bada-bing-bada-boom!

We’ll see in close detail examples like this coming in the following posts, but to sum up, Sapio helped us with the following:

1. Authoring a Smart Contract Application for a cold storage deposit solution
2. Distributing it as a deterministic executable with a GUI User using it to make a deposit
3. Receiving funds as a depositee directly into a smart contract
4. Generating withdrawal transactions out of the vault
5. Putting the remaining funds back into the cold storage

This is not a hypothetical, all of these components exist and are usable today! Where there is an asterisk is that BIP-119 CTV does not yet exist, and so for apps like this the exchange would have to run some kind of signing server you connect to. This works, but is a worse trust model. For some applications, you don’t need CTV if you can get all of a contract’s parties to run their own oracles. Therefore you can still accomplish a lot without a worse trust model with what’s there today!

Over the remaining posts we’ll go into great detail on different applications built in Sapio, but for now you can skim through learn.sapio-lang.org to get started playing around with your own designs.

Contracting Primitives and Upgrades to Bitcoin

Day 8: Rubin's Bitcoin Advent Calendar

Welcome to day 8 of my Bitcoin Advent Calendar. You can see an index of all the posts here or subscribe at judica.org/join to get new posts in your inbox

In this post we’ll rapid fire roll through a bunch of different smart contract primitives, existing and proposed. For a more thorough reading, links will be provided.

BIP-119 CTV CheckTemplateVerify

CTV is a general purpose smart contract opcode with full enumeration, no dynamic state, no recursion, and primarily works through validation.

Essentially, CTV only lets you select a specific next transaction that can occur. Consensus just checks a transaction hash against a CTV hash.

Although this seems to be limited functionality, it can be used with a template metaprogramming system such as Sapio to create sophisticated programs.

The limited functionality isn’t a bug, it’s a feature. CTV was designed to be quick and easy to garner technical consensus with the entire Bitcoin community as a simple and safe covenant without some of the issues more sophisticated covenant systems might have. However, since its launch there’s been more interest developing for more flexible covenants, which may take much longer to deploy and deliver meaningful benefits to users.

CTV is also designed to work well with other opcodes that might be added (such as CSFS, OP_AMOUNT, and OP_CAT), so it does not become irrelevant should more features be added, it simply gets better.

CTV is currently a decently reviewed BIP pending more support from the community for inclusion (see social signals).

Disclosure: I’m the author/advocate of BIP-119.

For more:

1. Optech
2. utxos.org
3. Templates, Eltoo, and Covenants, Oh My!
4. Shinobi’s Covenant Concerns

BIP-118 APO AnyPrevout

AnyPrevout is a culmination of research for the Lightning Network (dating back to the original whitepaper) for creating a type of “rebindable” bitcoin transaction that dramatically simplifies the protocols for LN by getting rid of a lot of the complexities around storing state and closing channels unilaterally. AnyPrevout helps make Decker Channels possible (or, confusingly, sometimes called Eltoo not to be confused with L2).

The basics of how Anyprevout works is that it changes what parts a signature signs to exclude the specifics of the coin being spent. This has some drawbacks in terms of changing current invariants true of signatures, but it is generally safe.

APO can also be used to implement something similar to CTV, but there are sufficient differences between the two (including with respect to efficiency) such that the proposals aren’t competitive.

APO is currently a decently reviewed BIP pending more support from the community for inclusion. The largest blocker for wider support is a concrete functional prototype of LN with Decker Channels, which would drive surety that APO has “product market fit”. Certain developers believe that additional proposals, like SIGHASH_BUNDLE, would be required to make it fully functional.

1. My BIP-118 Review
2. The BIP
3. Eltoo/Decker Channels
4. Templates, Eltoo, and Covenants, Oh My!

TLUV TapLeafUpdateVerify

TLUV is a proposed general purpose smart contract opcode that is open ended, has dynamic local state, recursive, and is somewhat computational.

Essentially, TLUV lets you modify a Taproot Output being spent by changing the toplevel key and script paths being spent. TLUV only can read and affect a single input/output pair; the other outputs are unaffected. The functionality of TLUV is very “specific” to the implementation details of Taproot, as it must correctly modify the data structures behind it. For Example, you could have a Taproot output with 10 coins and a script like:

[{"amt": 10,
  "key": "multi(A,B,C)",
  "scripts": ["signed(A) with up to 2 coins",
              "signed(B) with up to 5 coins",
              "signed(C) with up to 3 coins"]
 }
]

and TLUV would enable you to transition to the following outputs:

[{"amt": 9,
  "key": "multi(A,B,C)",
  "scripts": ["signed(A) with up to 1 coins",
              "signed(B) with up to 5 coins",
              "signed(C) with up to 3 coins"]
 },
 {"amt": 0.25,
  "address": "someone paid by A"
 },
 {"amt": 0.75,
  "address": "someone else paid by A"
 }
]

or even a full exit:

[{"amt": 9,
  "key": "multi(B,C)",
  "scripts": ["signed(B) with up to 5 coins",
              "signed(C) with up to 3 coins"]
 },
 {"amt": 0.25,
  "address": "someone paid by A"
 },
 {"amt": 0.75,
  "address": "someone else paid by A"
 }
 {"amt": 1,
  "address": "A's key (exiting funds)"
 }
]

There are some potential footguns around modifying the top level key, as it needs to be a valid Taproot key after tweaking.

TLUV as designed requires some form of OP_AMOUNT to enable the recursive shared UTXO shown above.

There is no current concrete proposal (e.g. BIP) for TLUV, it’s open ended research presently.

1. Optech
2. Mailing List
3. My Mailing List Response

CSFS CheckSigFromStack

CheckSigFromStack, or CheckDataSig (note for experts: usually shorthand for the verification-only version as there’s little point to check that something wasn’t signed by someone) is an opcode which checks an arbitrary message was signed by a key. Normally, when a Bitcoin script checks a signature, the message must be a hash of the current transaction computed in accordance with the requested transaction hashing program.

CSFS has a couple “basic” applications that could be useful. For example, one might write a program where either a key K signs a transaction normally, or it signs a key which then signs a transaction. This allows the holder of a coin to “delegate” the ownership of a coin to another key without moving the coin.

CSFS already exists in Bitcoin in some sense: using Lamport Signatures it is currently possible to check a signature over 5 bytes of data. This is not terribly useful, but one could imagine certain uses for e.g. delegating to the specified signer the duration of a timelock.

CSFS really shines when it is combined with other opcodes. For example, CSFS plus CTV can enable something similar to AnyPrevout and Eltoo. CSFS plus CAT enables fully generic covenants in segwit V0, but not in Taproot (without some sort of OP_TWEAK as well). This is best left to reading some additional materials on the subject, but imagine if I first check the transaction signature normally, and then I check it on the stack against the transaction itself pushed onto the stack, which I used CAT to assemble from pieces. This would let me run programmatic checks on all the components of a script).

While there is not currently a proposal for CSFS, it’s not terribly controversial and the design would be relatively straightforward.

1. BIP Suggestions
2. Templates, Eltoo, and Covenants, Oh My!
3. CSFS from Math (5 bytes)

OP_AMOUNT

OP_AMOUNT was proposed in 2017 by Johnson Lau (the earliest citation I could dig up) through a scripting extension called PUSHTXDATA that allows arbitrary data to be pushed on the stack. As a standalone extensions, getting the amount spent/created on the stack (whether as a push opcode or an opcode with verify semantics) would allow for smart contracts to either limit the amount being spent or switch behavior based on the amount.

For example, with TLUV a Taproot branch can have an individual balance that can be updated at the discretion of the branch holder. Suppose I had a script tree that said Alice has 1 bitcoin and Bob has 20 Bitcoin. When Alice is spending, the script would require that the corresponding output (e.g., input 0 output 0) be reduced by at most 1 Bitcoin, and the output should be updated to change Alice’s script to have 1-(spent amount) in the next instance.

As another example, CTV could be used with an OP_AMOUNT to enable a ultra high security vault if the amount sent is greater than 1 Bitcoin and a lower security vault if it is less than 1 Bitcoin.

There’s no current concrete proposal for OP_AMOUNT. Difficulties in adding it remain because Bitcoin Scripts deal in 32-bit math and amounts are 64-bit values (51 bits precisely).

1. OP_PUSHTXDATA
2. OP_IN_OUT_AMOUNT

SIGHASH_BUNDLE

Sighash Bundle is a part of an effort to make “Sighash Flags” more general. Sighash Flags are a mini “programming language” to describe what parts of a transaction a signer wants to sign for a transaction. Bundles in particular allow a signer to select a range of inputs and outputs in a way that the bundle description can be rebound to allow some form of post-hoc aggregation of transactions.

It’s primarily proposed to help make Decker Channels work with a sub-protocol called “layered commitments”. It’s possible for inclusion, but it has the same issue as AnyPrevout, we need to see an end-to-end implementation of LN using it to be sure that the technology is solving the problem it is designed to.

There’s no concrete implementation proposed yet.

1. Mailing List Post

Transaction Sponsors

Transaction Sponsors is another proposal by yours truly.

The basic concept of Transaction Sponsors is to allow expressing logic that Transaction B should only be in a block if Transaction A is also in the block. In particular, the proposal says that a transaction with a 0 value output with script OP_VER <txids> would make the transaction valid only if the txids were also in the block.

The ability to express such a dependency has implications for designing novel smart contracts based on these dependencies, but this is not the focus of the sponsors proposal with respect to mempool policy.

Instead, the Sponsors proposal is to use the ability to express additional dependencies as a way of dynamically adding fees to transactions in the mempool without relying on CPFP or RBF. This primitive is particularly helpful for driving progress of smart contracts based on CTV or Decker Channels without requiring any sort of transaction malleability.

There is currently an implementation and Draft BIP of Sponsors, but the BIP has not been advanced for inclusion yet.

1. Mailing List Post
2. Post about difficulties of paying fees

OP_CAT (Or SHASTREAM)

OP_CAT is “deceptively simple”. All it enables is the ability to take an argument “hello “ and an argument “world” and join them together into “hello world”.

CAT was originally a part of Bitcoin, but it had some implementation flaws and was removed by Satoshi in an emergency patch early on in Bitcoin’s history.

Although it is simple, it turns out that the ability to join bytestrings together adds a remarkable variety of functionality to Bitcoin, including things like quantum proof signatures and covenants. There are a couple different variants of CAT that would be possible and have different tradeoffs, but largely CAT and friends are not controversial in their design. What does make CAT controversial is that because it has the propensity to introduce so many surprising behaviors in Bitcoin, we might prefer to better understand the impacts of users being able to author such advanced smart contracts.

1. Quantum Proof Bitcoin
2. Poelstra CAT Blog I
3. Poelstra CAT Blog II

OP_TWEAK / ECMUL

These two opcodes enable manipulating an elliptic curve point on the stack for use in a covenant or to compute a particular private key.

There’s no concrete proposal for this pair, but the implementations are basically specified already by the requirements of the secp256k1 curve.

Adaptor Signatures

Adaptor Signatures are a technique that can be used with Schnorr signature and do not require any additional forks to Bitcoin.

The basics of an Adaptor signature is that a party (or group of parties) can create an object which either takes in a signature and reveals a secret or takes a secret and reveals a signature.

These adaptors can be used in place of hash preimage locks for a variety of use cases.

1. Optech

Delegation / Graftroot

Delegation is a general concept whereby you can take a script and instead of signing a transaction, you sign another script that can then execute. For example, imagine if there is a coin that requires a signature of Alice and Bob to spend. Suppose Alice wants to go offline, but Bob might want to transact. Alice could sign a script requiring a signature from Carol that “substitutes” for Alice’s signature in the future.

Delegation is currently possible in a somewhat roundabout way through coin-delegation. This is where the other script fragment must be represented by a UTXO.

Graftroot is an extension to Taproot which would let the top-level key-path signers sign delegating scripts, but not other tapscript branches. There are also several confusingly named extensions and alternatives in the links below.

Delegation could also be combined with Anyprevout so that delegation authorizations are bound to a specific coin or to a specific script. CSFS enables a basic kind of delegation as well. This would enable, with Graftroot, a version of Taproot where the trees are constructed interactively and do not have any lookup cost.

Other than what’s presently possible, there are no concrete proposals for adding new delegation features to Bitcoin.

1. Coin Delegation
2. Graftroot
3. Entroot
4. G’Root (not graftroot)

BIP-300 DriveChains

Drive chains are a highly application specific type of recursive covenant that is designed to help sidechains operate by tracking sidechain deposits and withdrawals with an on-chain miner driven voting system.

The sidechains would have the ability to run arbitrary smart contracts (at the choice of the sidechain operators). Miners the upvote, downvote, or abstain from voting on withdrawals through a special output type.

One of the main downsides to this approach is that the BIP-300 proposal as written requires the addition of new global state databases, rather than local state contained within the covenant transaction itself.

Overall Drivechains are relatively controversial among the community; with lots of interest from the community and also some outspoken critics because of the changes to Bitcoin’s incentive stability for consensus. It’s included here for completeness and by request of what topics to cover in today’s post.

It’s the author’s opinion that while the concept of Drivechains is useful, the implementation of it does not need to be as transactions inside of the existing block space and instead could be tracked via a separate commitment (like Segwit). This could happen if Drivechains were implemented via a more generliazed covenant rather than application specific.

1. BIP-300
2. Drivechains

Elements Opcodes

Elements is Blockstream’s Bitcoin fork for their Liquid Sidechain. Elements has planned to add a broad variety of opcodes that can help to accomplish a variety of tasks, including many of the above, in addition to their existing extensions.

1. Existing Opcodes
2. Upgrade for Taproot

Breathe! That was a lot! There’s still other stuff that’s floating around, but these are the top-of-mind primitives in my head for bringing more programmability to Bitcoin.

Future posts will zero in on what’s possible with BIP-119 and Sapio and help make the case that it is a fantastic next step in Bitcoin’s Upgrade journey by showing (not telling) how one little limited opcode opens up an entire world of possibilities, as well as laying out a – dare I say – personal roadmap for the inclusion and development of other upgrades as a coherent narrative for Bitcoin.

Review of Smart Contract Concepts for Bitcoin

Day 7: Rubin's Bitcoin Advent Calendar

Welcome to day 7 of my Bitcoin Advent Calendar. You can see an index of all the posts here or subscribe at judica.org/join to get new posts in your inbox

In this post we’ll review a concepts for thinking about different types of smart contract capabilities and the implications of their availability.

Recursive v.s. Non Recursive

Recursive is pretty much just a fancy way of saying “loops”. This is sometimes also called “Turing Complete”. That’s an even fancier way of saying loops. For example, imagine a bitcoin contract with the following logic:

When Alice requests moving 1 coin to Bob by broadcasting a transaction with the request, Alice has 24 hours to completely cancel the transfer by broadcasting another transaction.

This is a looping contract because after cancelling Alice can immediately re-request the transfer. An example of non-looping but similar logic would be:

When Alice requests moving 1 coin to Bob, Alice has 24 hours to cancel the transfer by sending the coins to Alice’s backup key.

Here, the contract terminates after one canceled request by moving the coin elsewhere. It’s possible to emulate recursive behavior a limited amount by “unrolling” a loop. For example:

When Alice requests moving 1 coin to Bob, Alice has 24 hours to cancel the transfer by sending the coins to (when Alice requests moving 1 coin to Bob, Alice has 24 hours to cancel the transfer by sending the coins to Alice’s backup key).

Here we substituted the backup key with a copy of the original logic. Now Alice can make 2 cancellable requests before sending the money to the backup. This looks recursive, and it can be expressed by a recursive meta-program. Meta program is just a fancy term for a program that makes programs. But when we put the contract into writing (e.g., an address on the chain), it has to be unrolled for the specific number of iterations we want possible.

Unrolling is a very useful technique, and can be used in a broad variety of circumstances. For example, imagine we unroll a contract a million times and specify that transactions can only happen every 10 blocks. That covers like 200 years of contract execution. However, unrolling has it’s limits. When choices (action A or B) are introduced, unrolling can be less effective since you have and exponential blowup (that means unrolling even like 32 steps might be too many). However, there are some tricks that can be employed by a clever and careful programmer to reduce this complexity through, for example, memoization.

Fully Enumerated v.s. Open Ended

Suppose I have a contract which is supposed to strike an American option¹ and transfer a token. It might look like this:

If Alice is paid 1 BTC by December 25th, 2021 Midnight, then transfer 100 tokens to Bob’s Control.

A fully enumerated contract would be expressed as:

If Alice is paid 1 BTC by December 25th, 2021 Midnight, then transfer 100 tokens to Bob’s Address B.

Whereas an Open Ended contract would be expressed as:

If Alice is paid 1 BTC by December 25th, 2021 Midnight, then transfer 100 tokens to the address Bob requested with the payment.

The key difference being that in the fully enumerated case we must know the exact specifics of the contract and how it will execute, and in the open ended contract case there are bits and pieces we can dynamically specify.

There are ways that a fully enumerated contract can emulate dynamic choice. For example:

If Alice is paid 1 BTC by December 25th, 2021 Midnight, then transfer 100 tokens to one of Bob’s Address B1, B2, or B3 at Bob’s discretion.

Now Bob can pick from one of three destinations in the future. However, these options must have been known in advance (a priori). With an open ended contract, the address could be generated after the fact (post hoc).

This is a separate concept from recursive or non recursive. A contract that loops could loop through a set of fully enumerated states until reaching some terminal predetermined “exit” state (e.g., a plain address). The option contract described above is non-recursive, but can be open ended.

Client v.s. Consensus Validation

When you have a Bitcoin in an output, anyone who has run, say, Bitcoin Core can tell that it is valid by seeing it in the UTXO set. But what happens if you want to issue a token on top of Bitcoin with some set of unique rules? Bitcoin does not know anything about these tokens, and so it would be possible to make an invalid transaction (e.g., spending more value than you have). In order to ensure the token is valid and not corrupt, one must trace every prior transaction back to some “axiomatic” genesis transaction(s) minting the token. These traces can be cached, but by default Bitcoin software will not enforce that only valid transfers be made. We say that the token is Client validated while the Bitcoin is Consensus validated.

Is one worse than the other? Not necessarily. While permitting invalid transactions in the chain seems bad, as long as the invalid transactions can be uniformly excluded by all who care about the token it is not much worse than the work you do to run a Bitcoin full node anyways. There does seem to be some value in the Bitcoin network preventing you from making invalid transactions, but the network doesn’t stop you from making bad transactions (e.g., you could send money to the wrong place).

Client side validation can check all sorts of properties, not just tokens. For example, you could write a contract for an on-chain governed company and check transactions for valid state transitions amending the rules.

The main drawback to client side validation comes when you want your contract to interoperate with Bitcoin values. While client side validation can burn tokens that are transferred invalidly, imagine an exchange contract that swaps Bitcoin for Token. If the exchange contract sends more Bitcoin than it should, the clients can tell that it was an invalid transaction but the Bitcoin is still gone. Thus Client validated contracts are best left to things that don’t hold Bitcoin. The exception to this rule is if the Client validated contracts admit a custodian, a special monitor or set of monitors that handle the contracts Bitcoin balances in e.g. a multisig. The monitors can client-side validate the contracts and sign off on any balance transfers. The drawback to this approach is trust, but in certain applications that we’ll see later the monitor could be all of the participants themselves, which makes the application of the rules trustless.

Validation v.s. Computation

Validation and Computation are two sides of the same coin. A simple example to demonstrate:

Validation is a computation, but hopefully it’s easier to perform the validation computation than the computation itself.

In a Bitcoin transaction we are always validating that the transaction was approved. A transaction in Bitcoin makes a clear precondition (the coins spent) and postcondition (the coins sent). Even in cases where we have to do a lot of computation to check the authorization, we still know the proposed outcome.

Compare to an Ethereum transaction: We pass some input to a function, and the EVM verifies that our input was authorized (e.g., send 1 Eth to contract X with message “hello”). Then, the side effects of that action are computed dynamically by the EVM. For certain contracts, we might be able to predict what the side effect will be (e.g., a 1:1 token exchange like Eth to Wrapped Eth), but for other contracts (e.g., a floating exchange rate for Eth to Wrapped BTC) we will get an outcome that can’t be fully predicted. It is possible for contracts to choose to engineer themselves in a way to create more predictability, however in Ethereum this does not result in an Invalid transaction, it results in a valid transaction (that e.g. still costs gas) that has a result which is not taken. For example, a transaction which says “Buy 1 WBTC for 15 ETH” might fail to acquire WBTC since the price is now 16ETH, but the transaction would be valid that you tried to make the trade and failed. This is because Ethereum’s base layer is computational in nature with little validation: validation must be built on top.

Sidenote: Malleability

For certain Bitcoin “covenant” transactions the validation/computation line can be thin. Transactions must always be transactions in a block, but it’s possible that in the future miners could receive “details” of a transaction and be responsible for generating the appropriate transaction themselves. For example, Blockstream released details on a noninteractive feebumping transaction, whereby a miner can dynamically compute a transaction that pays them more fees the longer it takes to confirm.

In the case of malleability like this, it’s not as simple as saying “don’t do it”, because miners have an incentive to extract the value if it is available.

Dynamic State

Contracts can have different types of state. State is just a fancy term for information available to execution.

Global state is information that is observable from anywhere. An example of this in Bitcoin is the UTXO Set: any transaction could spend any coin, and can “pull it into scope” by naming it’s Outpoint (whether or not the transaction is valid is another question). Another example of global state is the current block height, used for validating things like lock times. In Ethereum, there is a much expanded concept of Global state whereby contracts persist and allow read/write access from other contracts, and unlike Bitcoin’s UTXO set, observing a piece of information doesn’t destroy it like spending a coin does.

Local State is information observable only within your own context. For example, a contract might hold balances for 3 different people, but the current values of those split balances is not something queryable by outside parties. This also includes implicit state, such as “the contract is currently pending an Action from Alice” that are not explicitly coded.

Lastly, certain things are not State. An example of this is an authorizing signature, which is ephemeral data that is used in the transaction execution but does not have relevance for the continued execution of the contract and is not particularly observable (which signature we use shouldn’t matter).

General v.s. Specific

A General contract primitive is something that can be used across many different types of contract. A Specific contract implements well defined logic. In Bitcoin and Ethereum, the focus is on General contract primitives that can be used many ways. In some other ecosystems (e.g. NXT, Stellar), contract primitives have much more specific functionality.

General/Specific ends up being more of a spectrum than a binary. Certain contract primitives might be very specific but find general use, similarly some general primitives might be more general than others.

For example, the Lightning Network on Bitcoin has pursued a path of using general purpose extensions to Bitcoin so as not to “special case” payment channels. But is that worth it? Might Payment Channels be cheaper, easier to use, etc if we just designed built-in channels from the get-go? Perhaps yes, but then it might be harder to embed other things or incorporate new innovations into Lightning if it had to fit a single mold.

This isn’t an exhaustive list of topics by any means, but it should be a good primer for thinking about upgrade proposals that people discuss in Bitcoin. You’ll find out more about that in… tomorrow’s post!.

What's Smart about Smart Contracts: Bitcoin Maxi Edition

Day 6: Rubin's Bitcoin Advent Calendar

Welcome to day 6 of my Bitcoin Advent Calendar. You can see an index of all the posts here or subscribe at judica.org/join to get new posts in your inbox

Now that we’ve established the four pillars of Privacy, Decentralization, Self Custody, and Scalability, let’s get into smart contracts. But first…

DOES BITCOIN HAVE SMART CONTRACTS?

There is a lot of fuss around if bitcoin has or doesn’t have smart contracts, and this is usually people talking past one another. Bitcoin does have enough functionality to create certain smart contracts. But Bitcoin does not “have Smart Contracts” in the same way that, say, Ethereum “has” Smart Contracts. Sure, one can argue that because Ethereum is weaker in terms of its fulfillment of the four pillars, it doesn’t really have smart contracts either. But almost undeniably there is something happening in the Ethereum Ecosystem that isn’t happening for Bitcoin – yet.

Often, Bitcoin Boosters will say that the types of things happening on Ethereum aren’t desirable at all and are just scams. Many of these Boosters then go on to promote projects of similar dubious nature… but that’s off topic for this post! While there are many projects that frankly suck, there are also many projects on Ethereum that are relevant to the interests of Bitcoiners! Examples of projects that advance Ethereum’s realization of these 4 pillars that would be difficult to build on Bitcoin include: Gnosis Safe for Custody; Tornado Cash for Privacy; Optimistic/Zero Knowledge Rollups for scalability; SmartPool for on-chain mining pool coordination. It’s claimed that any time something of value proves out in the other ecosystems, Bitcoin can easily just incorporate the highlights.

My position is somewhat unique on this matter: Smart Contracts aren’t something you build on top of a layer with good decentralization, privacy, scalability, and self custody – Smart Contracts are a central part of what makes achieving those pillars possible! In other words, we need a Smart Contract ecosystem that enables broad innovation in order to make our four pillars robust. This is not the same as saying we need the Ethereum VM, but we do need something to be different than the status quo today to empower builders to create new tools on top of Bitcoin. This differs from a traditional Bitcoiner perspective which is more along the lines of once we improve our (insert generic property here); then we can consider figuring out how to add more smart contracts.

That bar sucks it’s too crowded

Another reason sometimes given for not wanting smart contracts is that they’re too expensive and won’t scale. While this is a valid concern, the story around fees is somewhat interesting. You may have seen people complain about high fees on other platforms and say therefore it sucks and should die. It’s a bit like saying a crowded bar is no good. Obviously, if people are at the bar it is good. That your enjoyment is less is solely because you’re antisocial. On other platforms, there are users paying exorbiant fees to do transactions… but would they be doing them if they weren’t getting commensurate value? Let’s have a look at some data from cryptofees¹.

Clearly a lot of folks are willing to pay for Ethereum and projects on top of it. Bitcoin is ultimately a business, and it relies on its customers paying fees to incentivize the production of blocks. More fees, more incentive to provide security for Bitcoin. It’s a little problematic, therefore, when users are getting more utility from (by virtue of how much they are spending) other chains than Bitcoin².

Although we need to be careful to not hurt Bitcoin’s essential properties, it’s clear that smart contracts provide massive leverage for incentivizing users to do transactions to pay for block production, without which Bitcoin falls apart.

Capitalist or Communist?

The last point I’ll leave you with is perhaps a bit charged / “problematic”, but I think it’s a good one. Bitcoin is a bit like America. Ethereum is a bit like China. Provisionally, America is the Free Market Capitalism country and China is the State Controlled Communist Markets country. In practice, if you visit a market in China there seems to be a lot more capitalism than in the US. Tons and tons of small businesses, operating with (seemingly) little regulation. On the other hand, in San Francisco you can spend $200k trying to get permits for an Ice Cream shop and fail. On the flip side, in the states once you’re successful and operating it’s pretty darn hard for the government to substantial interfere. In China, your CEO might vanish for a few weeks like Jack Ma.

Bitcoin is a bit like America. Building on it is incredibly hard, but if you figure it out and crack the code it’s supposed to work forever and devs bend backwards to ensure your use case won’t break.

Ethereum is a bit like China. Building on it is incredibly easy – at first – but if what you’re doing violates the “social order” your thing will get rekt by king VB with EIPscallibur. Examples of this include the removal of refunds for clearing space which bricked a popular gas fee arbitrage token.

Now, obviously this description is tinged with preference. I love America. Best country in the world (or, rather, terrible country, just better than all the other terrible countries). However, Bitcoin is not America and Ethereum is not China. There can be a middle road, and benefits from such an approach as well. Smart contracts seem to be really good at enabling permissionless innovation. Permissionless innovation is great for capitalism! Capitalism is great for improving utility of users and coordinating people. Wouldn’t it be nice if building on Bitcoin didn’t require getting proposals passed the developer “commitiburo” and more innovators picked Bitcoin as the best chain to build new ideas on top of? Obivously we don’t want to sacrifice the other parts that make Bitcoin great, but we can still entertain the types of economic benefits we would see by enabling more permissionless innovation. Because ultimately, and perhaps tautologically…

The best platform for capitalism wins

As described, Bitcoin has certain positive and negative properties. Ethereum too. At the end of the day, in aggregate, what “matters” is what participants choose to use and rely on through a free market selection process. That’s why despite not offfering the playground of Ethereum, Bitcoin has something that people value more: stability. However, stability and stagnation are two sides of the same coin. Stagnate for too long and competitors will eat your lunch. And perhaps the stability that makes Bitcoin unique will eventually be convincingly present in other ecosystems, despite Bitcoin’s head start in that endeavor.

Spooky Scary!

In the coming posts we’ll review the concepts more in depth, the state of the art research for Bitcoin Smart Contracts, and get into some examples of useful Bitcoin contracts.